Alok Ind.: Equity dilution to lighten debt burden

• Despite the economic slump, Alok Industries witnessed appreciable growth in domestic sales (60% YoY) as well as exports (23% YoY) during 9mFY09. This was particularly due to the change in product mix in apparels and higher realisation from garments. The woven apparels, which continue to be the mainstay in Alok’s business, showed very appreciable momentum in growth while the proportion of home textiles declined from 21% in 9mFY08 to 17% in 9mFY09.
  Sales breakup

  (%) of sales	9mFY08	9mFY09	% change
  Yarn	1,075	947	-11.9%
  % sales	7.5%	4.6%
  Knit apparels	942	1,120	18.9%
  % sales	6.6%	5.4%
  Woven apparels	5,032	9,237	83.6%
  % sales	35.1%	44.9%
  Home textiles	2,954	3,544	20.0%
  % sales	20.6%	17.2%
  Garments	472	887	87.9%
  % sales	3.3%	4.3%
  Retail	38	67	76.3%
  % sales	0.3%	0.3%

• While volumes in the branded garment space are not very enthusing, the company has not compromised on the realisations on the same, seeking its positioning in the premium category. The proportion of garments in overall sales increased marginally from 3.3% in 9mFY08 to 4.3% in 9mFY09. We have been conservative in our future growth estimations in this segment considering the pressure on retailing costs.

• High debt to equity ratio and steep interest costs have been the bane of contention for the company over the past few months and have eaten into its net margins. With the impending rights issue and conversion of warrants into equity shares the company is expected to have sufficient funds to partly relieve itself of its high leverage. The total debt to equity ratio (net of cash) stood at 3.0 times at the end of December 2008.

• Despite, drop in demand (10 to 15%) and possibility of having significantly higher surplus cotton inventory for the country, the prices of cotton, though lower than last year, are still ruling at higher levels. Alok Industries has entered into contracts for procurement of organic cotton.

• Although the management continues to remain bullish on the long term revenue prospects of its retailing venture ‘Homes & Apparels’, retailers across the country have witnessed a substantial drop in footfalls (upto 20%) and large inventory pile up. At present, Alok has 50 retail outlets plans to take it up to 1,000 stores in the next five years, spending about Rs 2.5 m on setting up each store and garnering revenue of Rs 4 m per store per annum.

What to expect?